Why China Delivered Such a Big Miss in Trade Data

China's dismal trade numbers for June far underperformed market expectations, with both exports and imports contracting last month against forecasts for a much better performance compared to May.

According to economists, this huge miss in China's trade numbers could be attributed to an underestimation of how severe the slowdown in global demand actually is.

"Markets are underestimating weakness in external demand conditions. The fall in exports is not all about the government's crackdown on over-invoicing," Junwei Sun, Beijing-based economist at HSBC told CNBC on Wednesday, referring to the government's efforts to prevent export firms from overstating theirbusinesses in order to bring funds into the country and surpass capital restrictions.

China's exports in June fell 3.1 percent from a year ago, marking the first decline since January 2012. The figures were a major miss against Reuters' expectations for a rise of 4 percent. Exports climbed 1 percent in May.

Imports were down 0.7 percent year on year in June, compared to a forecast of a rise of 8 percent, and worse than the 0.3 percent drop in May.

According to Sun, sluggish external demand is no longer limited to G-3 economies, with emerging markets also becoming a source of weakness.

Chinese exports to Southeast Asian markets fell to $19.6 billion in June from $20.8 billion in the previous month, according to data from Reuters, while shipments to the U.S. fell to $29.3 billion from $31.3 billion in the previous month.

And, economists expect the trend of weak external and domestic demand to persist for the remainder of the year.

"My base line is that there is no export growth in China this year, at least until a pick-up in G-3 economies begins to materialize," said Tim Condon, head of research for Asia with ING Financial Markets.

"The second consecutive contraction in import growth underlines current domestic demand is sluggish," said Sun of HSBC.

The trade surplus was $27 billion for the month, up from $20.4 billion in the month earlier.

Growth Estimates Unchanged

While the trade data underscores further weakness in the world's second largest economy, economists said the disappointing numbers have not caused them to recalibrate growth projections for China.

"My forecast for 7.5 percent growth in 2013 is consistent with flat export growth," said Condon. "The risk to the GDP forecast is not that exports fall off the table. Downside risks stem from tight monetary conditions."

Asian equity markets also remained resilient on Wednesday despite the weaker data.

Market watchers said sluggish exports did not come as a huge surprise given the contraction in HSBC PMI's (purchasing managers index) new export orders sub-index in June. Weak export data from another major exporter in the region South Korea which was released earlier this month also gave an indication of what to expect.

The new export orders sub-index fell to a 39-month low of 45.8 - a reading under 50 signals contraction. While, South Korea's exports fell for the first time in four months in June, declining 0.9 percent year on year.